Unocal bid reveals China's intense demand for energy

EDWARD CODYhe Washington Post

Published Saturday, July 02, 2005

BEIJING -- Although China's attempt to buy an American oil company has aroused national security and free-trade objections in Washington, the effort has been portrayed in Beijing as business-as-usual for a fast-growing country scouring the world to meet soaring energy demands.

A Foreign Ministry spokesman, Liu Jianchao, described the $18.5 billion bid as "a normal commercial activity" between big international companies in an era of increasingly scarce resources. "We think that these commercial activities should not be interfered in or disturbed by political elements," he said at a briefing.

The unsolicited offer last week by CNOOC Ltd. to take over Unocal Corp. of El Segundo, Calif., was only the latest move in an intense campaign to ensure that China's economy doesn't run out of gas. Securing energy sources has become a major factor in Chinese foreign and trade policies, part of what Chinese analysts call the government's "energy obsession." In a measure of this campaign's importance, Premier Wen Jiabao formed a high-level task force this month that is focusing on national energy and includes Foreign Minister Li Zhaoxing, Commerce Minister Bo Xilai and Finance Minister Jin Renqing.

CNOOC, which is 70 percent government owned, has long been a major player in the effort to ensure China's energy security. Traded on New York and Hong Kong stock exchanges, it is a subsidiary of China National Offshore Oil Corp., which is owned outright by the government and posted $8.6 billion in sales last year doing business in oil, gas, chemicals and fertilizers, in addition to power generation.

Despite China's economic liberalization, the links between CNOOC and the government of President Hu Jintao remain close. As Hu works to meet China's energy needs, he and the Communist Party retain control over vital industries. The parent corporation's president, Fu Chengyu, also heads the corporation's Communist Party chapter, for instance, and reports to the National Development and Resource Committee, the government's energy-management organ, as well as to Wen's high-powered energy group, according to the company. Fu is also chairman and chief executive of the CNOOC subsidiary.

Fu, who holds a master's degree in petroleum engineering from the University of Southern California, told reporters here that he would travel to the United States if necessary to help dispel objections to the takeover among U.S. officials and legislators. Through the official New China News Agency, he pledged to cooperate in any review by the Treasury Department and its Committee on Foreign Investments in the United States.

Viewed from government offices in Beijing, the wisdom of having CNOOC take over Unocal seems obvious, particularly as summer sets in and energy-hungry air conditioners fight 90-degree temperatures. China's oil consumption surpassed its production in 1993, at around 3 million barrels a day. Since then, consumption has risen to 5.5 million barrels a day, making China the world's largest oil consumer after the United States.

As a result, 30 percent of China's oil needs now come from imports. With domestic production flat and the economy growing 9 percent annually, imports are bound to rise steeply in the years to come. The U.S. Energy Information Administration has estimated China will need almost 11 million barrels a day by 2025 to keep its cars running and factories humming.

Already, some areas have started rationing electric power to industrial plants, and several cities suffered brownouts during heat waves last summer. In this context, the government recently started an oil tank farm in Zhejiang province, on the East China Sea coast, to build up its first petroleum reserves.

Hu told a meeting of Communist Party Politburo members here Tuesday that energy conservation should be among their major objectives.

Despite such calls, the number of vehicles choking Beijing streets has risen steadily; private cars have become icons of success for young Chinese across the country.

With 80 percent of its imported oil flowing from the Persian Gulf through the Malacca Strait chokepoint between Indonesia and Malaysia, China has sought to increase its military and diplomatic presence in the South China Sea and beyond. Following a "string of pearls" policy, it has sought access to bases in Pakistan, Bangladesh, Burma and Cambodia. In addition, Hu last month signed a strategic cooperation accord with Indonesia.

Concern over oil shipping lanes also has compelled China to launch a fast-paced shipbuilding program one of whose goals is to develop a navy capable of moving beyond territorial waters to ensure security farther out at sea, military specialists point out.

In the same spirit as the Unocal bid -- Chinese officials call it their "go out strategy" -- China has signed agreements with several African countries, including Sudan, for exploration, production and import of crude oil. It concluded a $70 billion arrangement with Iran last year for long-term imports of oil and natural gas and has courted Central Asian countries for similar accords. Even far-off Venezuela recently signed a deal for Chinese exploration of gas deposits.

Tim Payne, a spokesman retained by CNOOC to field questions on the takeover bid, said the decision to go after Unocal was based mainly on commercial considerations. Four of the company's eight board members are not executives of the company, he noted, and they have defended stockholders' interests in this and all such questions.

"They're making decisions with the same commercial considerations in mind as the other guys," Payne said.

China's energy needs, viewed from another angle, also create an energy market, he explained. Although production from Unocal's assets in the United States would continue to be directed toward the U.S. market, he said, Unocal rights in such countries as Burma and Thailand would be attractive resources for Chinese consumption.

Economists have noted, however, that in previous negotiations Chinese oil officials seemed willing to pay top dollar for foreign oil, underscoring the government's ardor to lock in supplies. But in a country with $610 billion in foreign reserves and an energy strain on the horizon, the deals may have seemed like a bargain back in Beijing

True to form, CNOOC's $18.5 billion offer for Unocal is considerably higher than that of Chevron, the previous top bidder, noted Hou Ruoshi, an economics professor at Beijing's Tsinghua University. In making its move, Ho said, CNOOC seemed motivated not only by a desire to enlarge its share of the Chinese oil market but also by national policy imperatives.

"I believe that oil security is part of the reason for CNOOC to make its bid, and it is part of China's oil strategy," he said.